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NIIT: Focus on margins

Jan 22, 2001

NIIT, a leading education and software major, recorded a jump of more than 50% in revenues for the year ended September 2000. This was despite slower growth in its education business. The changing business model of the company from education (contributes 51%) to software (49%) resulted in substantial improvement in margins. The company is rapidly transitioning itself to an e-business solution provider with e-revenues contributing 41% to global revenues. It also has well diversified geographic mix of software revenues wherein it gets 34% of sales from the US followed by 18% from Europe, 26% from Asia Pacific and balance from India.

NIIT has divided its business into independent business unit namely education & training, projects, software solutions and knowledge solutions. This is expected to help the company in achieving its target of Rs 100 bn revenues by 2006.

Quarterly Overview
(Rs m) First Quarter  
Year end September 30 FY01 FY02E Change
Sales 1,231 1,724 40.0%
Total Income 1,260 1,804 43.2%
Operating Profit 282 451 59.8%
Interest - -  
Depreciation 77 80 4.2%
Profit Before Tax 205 371 80.6%
Tax 20 20 0.0%
Net Profit 185 351 89.3%
No. of shares (m) 38.7 38.7  

Key Ratios
Particulars 1QFY01 1QFY02E
OPM 20.6% 21.5%
Tax/PBT 9.7% 5.4%
NPM 15.0% 20.3%
Cash EPS* 27.12 44.57
EPS* 19.17 36.29
* annualised    

NIIT is expected to record a topline growth of over 40% during the first quarter ended December 2000, led by its aggressive investments in sales and marketing. The company’s efforts have generated large order intakes in the past three months. It has recently received an order worth $31.7 m from Karnataka state for five years. Accordingly, NIIT will set up infrastructure for computer classrooms in 700 schools using latest software and networking technology.

In a move to improve the operating margins, software development centers of the company located at Delhi are working in double shifts. These development centers account for around 60% of its total offshore development capacity. All these factors will fuel bottomline growth, which is expected to be in the vicinity of 90%.

At the current market price of Rs 1,760 NIIT is trading at a P/E multiple of 23 times its September 2001 projected earnings. The company’s current valuations are lower as compared to its peers in the industry. In the coming years, if NIIT is successful in moving up the software value chain, it could trigger a re-rating in the stock.

Comparative Valuations
Particulars NIIT Infosys Satyam Wipro
Price (Rs) 1,760 6,779 418 2,914
P/E (x) * 23.0 77.0 46.4 124.0
* on one year projected earnings

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